The U.S. Treasury recently released its “2008 Financial Report of the United States Government.” In case you had any doubts, our government’s finances are in a terrible mess. According to the report, under generally accepted accounting principles (the ones that private businesses are required by law to use), Uncle Sam’s total financial liabilities—explicit debts and unfunded obligations—exceed $65 trillion. That’s five times as large as our national GDP—a GDP, by the way, that happens to be shrinking at an alarming rate.
I don’t know about you, but I find those incomprehensibly large numbers disorienting. I feel like Alice when she fell down the rabbit hole and entered a realm of the absurd.
Does anyone believe that the federal government will ever be able to scratch together an extra $65 trillion on top of the other trillions that Washington intends to spend every year? Not a chance. As I wrote last fall, “We’re Broke.”
So, how does the current administration propose to put Uncle Sam’s fiscal house in order? What plan does it have to rescue us from outright national bankruptcy? For starters, President Obama has presented a budget with an estimated $1.7 trillion deficit for 2010. Far from pulling back from the brink, we are plunging headlong into the fiscal abyss. We’ll never climb out of the hole by digging it deeper.
Being the astute politician that he is, Obama has already paid the politically obligatory lip service to the principle of fiscal responsibility by declaring his intention to cut the federal deficit in half by the end of his present four-year term. I sincerely hope he has more success in achieving this goal than his predecessor did. However, judging by the stock market’s negative reaction to Obama’s announcement, investors were less than thrilled by the prospect of a best-case scenario of $850 billion deficits three years from now. Such a deficit would still be nearly twice as large as any federal deficit that ever occurred before Obama’s presidency, and while he inherited much of that spending, he has not been bashful about proposing massive new spending initiatives.
There is another problem with Obama’s implied projection of reducing the deficit from $1.7 trillion to $850 billion: The numbers don’t add up. Obama said that he would achieve this reduction through a combination of increased taxes on the incomes of the top five percent of Americans and reductions in military spending. That’s impossible.
I just calculated a back-of-the-envelope estimate using 2006 figures, the most recent year for which I have data. There was approximately $440 billion of total income above the $250,000 threshold that Obama repeatedly cites as his target range. (Due to the collapse in the stock market and the precipitous decline in economic activity, the corresponding figure for the next few years likely will be significantly lower than $440 billion.) Even if Obama could somehow confiscate that entire amount, he would still be only halfway to his goal of trimming $850 billion from his budget deficit. Of course, no president could confiscate that amount, for the simple reason that if he tried, those taxpayers would quickly find ways to make that income disappear, either by simply not doing the work to generate that income or moving it offshore, disguising it, sheltering it in tax-exempt investments, etc. Even a partial move to capture those funds will, in true supply-side fashion, see that pie shrink, resulting in less-than-anticipated windfall for the government. As it turns out, the Obama administration has now stated that it plans to garner an extra $31.8 billion per year in higher taxes on “the rich.”
Let’s assume that the Obama administration succeeds in collecting an extra $31.8 billion in taxes from the rich (and never mind the coming loss in tax revenues due to corporate profits evaporating and millions of unemployed Americans no longer earning taxable incomes). The president and his team would need to trim more than $800 billion from the deficit. Since total military spending—including expenses for Iraq and Afghanistan—will be approximately $664 billion this year, Obama could theoretically abolish defense spending and still not achieve his budgetary goal.
The only possible way to rein in runaway deficits is to slash runaway federal spending. Neither party is making this case. The Republicans may not want government spending to increase as rapidly as the Democrats do, but how many Republicans have you heard calling for a reduction in federal spending? All we get from the minority party is the same old tired refrain—tax cuts. I am certainly not opposed to tax cuts. Lower taxes are economically beneficial. They lead to increased economic activity and production, and therefore are to be desired. Politically, calling for tax cuts is the easy part, the low-hanging fruit. Economically, though, tax cuts are not enough. There is no way that we are going to grow our way out of a $1.7 trillion deficit with tax cuts alone. Radical spending cuts are needed, but they are off the radar screen. Without getting federal spending under control, we will continue our fatal freefall into the fiscal abyss.